In This Guide We Provide Everything You Need to Know About Dealing With a Bad Debtor.
Running a business comes with all sorts of challenges that must be overcome.
One of the most annoying is when you have delivered a service or product and you’re not paid.
When a client comes on board and enters into an agreement you are protected by law.
You have a right to be paid for services or products delivered.
Some business owners feel its fair to pass their ‘bad debts’ on to other companies, but what can you do to try and recover the money you are owed?
If you have searched for, and found this blog post, then we are guessing you may be here as you are frustrated at not getting paid on time and are now seeking an appropriate way forward.
We also reason you may have tried to be flexible, offering part payments until the debt is paid.
It’s always good to be able to show you have been flexible, but if you are told repeatedly you will be paid, and then are not, what next?
One step is to consider passing the bad debt on to an external debt collection agency, for which a quick Google search will provide you a list of companies to choose from.
It might be worth mentioning that many debt collection agencies add additional fees and charges to your already unpaid invoice amount, and if your client is genuinely struggling, do you want to add additional pressure to their business? This ultimately will be your call. Let’s face it, even if you do involve a debt collection specialist, there are still no guarantees that you will be paid.
It is important to establish if you feel your client is trying it on, or they or genuinely struggling to pay.
If your client has tangible business assets and is still trading, still conducting business then their cash-flow problems are ultimately not your problem, or at least they shouldn’t be.
Make plans early – define and record an appropriate process to follow.
The first time you encounter a bad debtor can be a headache.
On the one hand, you value their business, and the relationship you have cultivated with them but then on the other, unpaid invoices can add serious pressure to your business and some times you just need to act. Some businesses even go under as a result of unpaid invoices, so it is extremely important for all businesses to be pro-active when it comes to collecting them.
It is easy to begin feeling like ‘the bad guy or girl’ when trying to collect your payment.
It is critically important to remember it’s not your fault! You have a right to be paid if you have delivered your products and services.
Make sure that you ask for the invoice to be settled and give a clear final deadline. If you have postponed the deadline repeatedly and the final deadline is missed, what now?
You will need to send the debtor a letter before action, and that action can be a choice of the debt collection agencies we have already mentioned, or you might want to ask the courts for assistance.
Remember, you have an agreement that the client signed up to and therefore the terms of business should stand, providing they are fair and not unlawful.
You can find more information on how to make a court claim for money here (https://www.gov.uk/make-court-claim-for-money)
It will cost you to take a bad debtor to court and the court fees change depending on the amount outstanding, but sometimes this might be the only option to get paid, and even then, there are no guarantees that the debtor will pay even after the courts intervene.
Court procedures should be a last resort and you should try several times to recover the amounts you are owed more informally.
It might be worth considering however, the longer you leave any debt outstanding the more uncontrolled risk this will introduce for your company. For example, if a company directors ship is sinking, you may not be the only company they owe money to, and so you could be at the back of a long line of creditors.
For this reason, you have to weigh-up if you want to go through an extended period trying to recover the debt if you feel there is a risk the client’s company could end up being liquidated which may make it very difficult to recover any of the monies you are owed.
A lot of businesses try to show flexibility by asking for split payments and deferring due dates but if your reasonable offers go ignored, you have to make a judgement call.
Remember, sadly in business, the nice guys and girls often finish last and let’s face it, you have every right to be paid and your business shouldn’t suffer because someone simply avoids paying you for your hardwork and effort.
Swift court action can be a very weighty call-to-action for bad debtors, some people just like to try it on, test your metal so to speak and a formal court process can often expedite payment, as most reputable companies will want to do all that they can to avoid a CCJ, which can seriously cripple their ability to secure credit in the future.
When approaching the courts for help, it is very important that you build up an audit trail of emails, calls and any other supporting evidence.
When applying to the courts, it is often better to provide a very succinct overview of your alleged grievance with your client e.g. by providing:
- A statement of the amount owed
- A copy of your signed terms of business with the bad debtor
- Evidence of your flexibility e.g. Emails to and from the client
- Transcripts of recorded calls promising payment
Remember also, that if you’re doing business with a Limited company, then you also have a right to add interest and charges to the late debt.
How to calculate interest on an overdue invoice:
- Establish the gross final invoice E.g. the amount plus VAT. In this example we will use an invoice amount of £1000.00 for services provided to keep things simple.
- Next we simply need to calculate the late payment interest owed, and this can be back-dated to the day the payment was first overdue.
Let’s say that the debt payment is now 45 days late. We would first need to work out the annual interest rate as follows:
Invoice amount = £1000.00 x 8.10% (e.g. 8% + the Bank of England’s Base Rate)
Total annual interest = £81.00
Next we work out the actual interest up to the current date e.g. £81 / 365 = 0.22p per day
The interest will continue to build until the debt is finally paid.
At the court, you will be able to claim for the invoice amount owed, plus interest and plus your legal fees. It really is better all around to encourage the debtor to pay.
Tools to Help You Avoid Bad Debtors
There are a number of resources to help you avoid bad debtors, both paid and free tools can easily be found online but here we will list a few of our favourites below. Try and spend some time in advance looking into the company and if something doesn’t feel right, go with your gut instinct.
This should be a starting point before all agreements are put in place. The Companies House website is a fantastic resource where you can find lots of useful information including filed accounts history, names persons of significant control, previous company names etc. Companies House can be especially useful in terms of establishing a director’s historic business practices, both in the current company and previous ones. It also highlights any other companies that the Director is involved in. This can sometimes provide beneficial perhaps if there is a potential conflict of interest. E.g. the Director at the company you are dealing with is also a Director at one of your competitors. This Government site is fantastic and worth getting familiar with.
This service will allow you to search the official register of County Court Judgements
Director check is a fantastic tool to get a high-level overview of a Limited company. You can search by the company name, company number and Directors name.
This tool can be a bit hit and miss sometimes, for example, some searches won’t reveal a result. In instances like this we recommend that you first run a search on Companies House and record the company number you find. When you enter the correct company number, you often find that the company does exist, it’s just that it’s had a recent change of company name.
This business intelligence platform offers a wealth of information to help your business avoid bad-debt.
There are tools to help find ‘your perfect client’ in terms of the search metrics you select. You also can leverage a fantastic array of financial information on the prospect you are researching which will help you make the appropriate decisions ahead of time. If something doesn’t look good on paper, chances are the reality would be a potential nightmare this tool might help you avoid.
Credit Safe is one of our favourite tools in terms of the wealth of information provided.
You can access large amounts of company data with different licence types depending on the needs of your business. Data is available in downloadable CSV files that can be imported directly to your CRM system to help with your future prospecting and sales processes.
Similar to Red flag alert, this tool will help you drill down into important financial information before you commit to deliver your products and services. Sometimes the best thing to do is to avoid what looks like a bad prospect.
Whilst being owed money is not a good position to be in, the information above should help you successfully recover the monies owed.
If you have found this guide helpful, please share to social media, thank you.